Victims of presidentially declared disasters in recent years who
couldn't previously claim a casualty loss deduction may now be able to claim a
refund. Additional tax relief also might be available. Read on to learn more
about the potential opportunities for victims of certain disasters.
Loosened restrictions for casualty losses
The tax relief comes via the Federal Disaster Tax Relief Act
(FDTRA), which was signed into law by former President Biden in December 2024.
Among other things, the law makes it easier to claim a deduction for qualified
disaster-related personal casualty losses during a specific time period.
Previously, you could claim such a deduction only if you
itemized your deductions. It was further limited by a $100 reduction per loss,
and you were allowed to deduct only the amount of the loss that exceeded 10% of
your adjusted gross income. The so-called 10% rule was applied after the $100
reduction.
Under the FDTRA, those restrictions no longer apply if you
suffered a casualty loss attributable to a presidentially declared disaster
(referred to as a "qualified disaster loss") that began on or after
December 28, 2019, and on or before December 12, 2024, and ended no
later than January 11, 2025. (Note that this relief doesn't apply to the
2025 California wildfires. See "Wildfire relief" below for information on other
relief available to the victims of those and other more recent fires.)
In addition, the president must have made the disaster
declaration between January 1, 2020, and February 10, 2025. The limit
for such losses is that each separate casualty loss is deductible only after it
exceeds $500.
Be aware that casualty losses are generally deductible in the
year the loss is incurred. For example, if a qualified disaster occurred in
2022, but your insurance company didn't deny your related claim until 2024,
you'd deduct the loss for 2024. But you now have the option to deduct any loss
attributable to a presidentially declared disaster in the tax year prior to the
occurrence.
Wildfire relief
The FDTRA provides that "qualified wildfire relief payments" —
including those made to Los Angeles County taxpayers affected by the 2025
California wildfires — can be excluded from gross income for tax purposes. It's
been estimated that this provision will return $512 million in taxes to
wildfire victims. And it'll protect payment recipients from losing certain
income-based benefits, such as health insurance premium subsidies, Veterans
Administration co-pay assistance and federal student aid.
The exclusion applies to any amount received by, or on behalf
of, an individual as compensation for losses, expenses or damages,
including for:
- Additional
living expenses,
- Lost wages,
other than compensation for lost wages paid by the employer which
otherwise would have paid those wages,
- Personal
injury,
- Death, and
- Emotional
distress.
The compensation must have been granted for a federally declared
disaster that was declared after December 31, 2014, as the result of a
forest or range fire. The payments must be received during tax years beginning
after December 31, 2019, and before January 1, 2026. Compensation
from insurance and other reimbursements doesn't qualify for the exclusion.
The law prohibits double-dipping. You can't claim a deduction or
credit for any expense excluded from income under the provision. And, if you
use excluded qualified payments to purchase or improve property, you may not
increase your basis or adjusted basis in the property by the excluded amount.
The IRS is also providing some relief related to filing
deadlines for individuals and households that reside or have a business in Los
Angeles County and were affected by wildfires and straight-line winds that
began on January 7, 2025. These taxpayers have until October 15,
2025, to file various federal individual and business tax returns and make tax
payments.
The new deadline applies to individual income tax returns and
payments normally due on April 15, 2025. This relief also applies to the
2024 estimated tax payment that was due on January 15, 2025, and estimated
tax payments normally due on April 15, June 16, and
September 15, 2025.
It also applies to:
- Quarterly
payroll and excise tax returns normally due on January 31,
April 30, and July 31, 2025,
- Calendar-year
partnership and S corporation returns normally due on
March 17, 2025,
- Calendar-year
corporation and fiduciary returns and payments normally due on
April 15, 2025, and
- Calendar-year
tax-exempt organization returns normally due on May 15, 2025.
East Palestine train derailment relief
The FDTRA also extends relief to victims of the train derailment
on February 3, 2023, in East Palestine, Ohio. "East Palestine Train
Derailment Payments" can be excluded from gross income.
The payments include any amount received by, or on behalf of, an
individual as derailment-related compensation for:
- Loss
- Damages
- Expenses
- Loss in real property value
- Closing costs related to real property (including realtor commissions)
- Inconvenience (including access to real property)
The compensation must have come from a federal, state or local
government agency, Norfolk Southern Railway, or any subsidiary, insurer or
agent of Norfolk Southern Railway.
Next steps for taxpayers
If you're claiming any of the benefits under the FDTRA for a tax
year for which you've already filed a tax return without claiming the benefits,
you'll need to file an amended return. We can file your amended return
electronically if you're amending a return for the current or prior two
tax periods.
You must file Form 1040-X, Amended U.S. Individual Income Tax Return, on paper to amend your return if 1) the amended return is for earlier years, or 2) your prior year return was originally filed on paper during the current processing year. If you file your amended return electronically, you can elect to have any refund directly deposited into a U.S. financial institution account.